Ask HN: How much do founders pay themselves?

https://news.ycombinator.com/item?id=1672215

by mrbird • 16 years ago

105 80 16 years ago

news.ycombinator.com

This is something I've always wondered about... When you take a VC round, how do you (as a founder) get your salary determined? Is it purely up to the board and investors? Is it up to you? How does it compare -- is it the bare minimum to live on, so that everything can go into the company? Is it comparable to an executive you'd hire? Somewhere in between?

I'm very curious about the calculus. I imagine it varies quite a bit by the type of investment made (e.g. angel vs. VC vs. institutional), but that's just a guess.

kleinsch• 16 years ago

You pay yourself a reasonable living salary, based on location and living expenses. It usually has to be approved by the board, but so long as it's reasonable, you should be OK. The idea is that you're not getting rich off your salary, you should be focusing on growing the company to get rich off your ownership stake. At the same time, you shouldn't be starving, because that will cause you to spend more time focusing on your personal finances than working on the company.

bherms• 16 years ago

You make a good point in your "You shouldn't be starving[...]" sentence -- One of the biggest productivity killers in my life is dealing with, or even worrying about personal finances. As a founder, if you decide you want to go get a few beers with friends and grab dinner, you shouldn't then have to worry about how you're going to recover the $30 you spent outside your budget. The key here, I think, is to pay yourself "enough to live in a manner that allows you to focus solely on your business and productivity."

jasonjei• 16 years ago

Usually less than everyone else as long as they are able to do a little more than subsist. They are taking equity. When other people who are hired on board find out founders are paid less than everyone else, it usually quells any negative attitude towards management

vaksel• 16 years ago

$400K...you are the CEO...you gotta get paid like one.

In reality it's how much you can afford. If you don't need money..pay yourself $1. If you need $15K to live on...pay yourself $15K.

At least until the company is profitable.

Once it's significantly profitable, you can afford to pay yourself more.

blacksmythe2• 16 years ago

CEOs of small companies don't make $400k.

CEOs that have run a successful business before might make $250k-$300k in Silicon Valley (a high salary area, to be sure).

$250k would probably be the high end for a CEO of a 30 person company, if the CEO had not had a major success before.

lanstein• 16 years ago

I think you missed the humor.

philwelch2• 16 years ago

This isn't the first time I've said this, but "CEO" sounds like a pretentious title for the head of a <= 30 person company.

niccolop• 16 years ago

I think it should generally be inline with what other funded startup founders pay themselves. I've been led to believe in the past this was between: $50-70k.

dstein• 16 years ago

You should think of it as equity, not money. Do you want to extract your equity (convert it to cash) now and buy stuff, or do you want to reinvest it in your business?

Construct• 16 years ago

When I was in the VC world, the founder's salary vs. equity demands were usually used to gauge how invested they were into the company's vision and concept. If the founders spent a lot of time penciling in $200K+ salaries, elaborate bonus and commission packages, and exorbitant perks (a $5K/month 'car allowance' was my personal favorite) for themselves, then it was a definite red flag. If instead they were willing to take modest salaries but fought hard for equity, you knew that they truly believed in their idea and were fully invested in the concept.

billclerico• 16 years ago

at wepay the founders are the lowest paid employees in the company

kno3• 16 years ago

How much?

gyardley• 16 years ago

Varies from founder to founder depending on their psychology and their personal situation. While the board approves it, you make the proposal.

There's a lot of benefit to being able to say 'this is a great opportunity, but we're being careful with our cash right now - I'm the lowest-paid person at the company' when recruiting. That said, you don't have to be a martyr and drain away your savings after you've raised. Your board may vary, but after a Series A you can likely justify a low six-figure salary.

thinkcomp2• 16 years ago

I pay myself $33K gross annually. I'm the lowest-paid salary employee in the company.

kno3• 16 years ago

$33K is pretty low in most places in the US, How do you manage to stay focus on runing the business?

thinkcomp2• 16 years ago

Given that I don't have to care for anyone, it's plenty to live on (even in Palo Alto) and have some left over.

trustfundbaby2• 16 years ago

When you're running your own business you'll be surprised at how few expenses you have, especially if you don't have an office.

I know for me, I absolutely must have $2000 to survive $2500-$3000 a month to be comfortable... anything over that is nice to have.

synnik• 16 years ago

You should never be the lowest paid.

Executives are paid not for the actual tasks they do, but for the fact that all responsibility and accountability is on their shoulders.

whatusername• 16 years ago

We can assume that she/he is being compensated through stock/equity. So they are being paid - just not with a salary.

joshbuckley• 16 years ago

Jason Calacanis had an interesting segment on this on his show. They say $50-100k. http://www.youtube.com/watch?v=kloJQ0EjgTE

jlees• 16 years ago

in the UK various funding bodies (eg. SMART) approve a founder salary of up to £40k, approx $60k, in line with other posts here.

gettingthere• 16 years ago

Here is my experience: first 1.5 years, nothing. Then $60K for the next year. Then as profits went up, it reached $120K. Stayed there for several years. Then profits went up more, $200K. Now at $275K.

kno3• 16 years ago

$275K not bad by most standard, you earned it!

sinamdar• 16 years ago

This is the first response giving hard numbers. Thanks for the candor.

jbyers• 16 years ago

Thanks for hard numbers. Can you describe in general terms what kind of startup you're in? How many years from nothing to now?

ahi• 16 years ago

The advice I have been given is that the founder salary should be market rate for skills/experience, but the actual check should be for bare living expenses. Ramen profitable is when you have the cash flow to sustainably sign the checks; profitable is when you can pay your own salary with backpay. This way you spell out your commitment/opportunity costs for potential investors and yourself while keeping cash requirements limited.

As I understand it, there are also some tax/legal issues regarding setting salaries since corporate profits and wages are taxed differently. This is what an accountant is for.

BenS• 16 years ago

I don't think founders should take giant salaries. At the same time, if you have funding, I think you should pay yourself enough to be comfortable.

People do short-sighted things when they are desperate. I think super low salaries increase the risk of burning out, giving up, or taking a more attractive offer. I think quitting for one reason or another is the biggest risk to a startup's success.

cemerick2• 16 years ago

Off-topic from the OP's question, but if you're incorporating as an S (for example, although other pass-through entities are similar), you need to pay yourself a "reasonable and appropriate" amount as salary. That is, you can't just pay yourself $1/year in salary and take $500K off in K-1 distributions (thereby avoiding FICA and other payroll-only withholdings). The IRS will tag you for that in a heartbeat.

jonpaul• 16 years ago

I would also like to point out that most Angel Investors/VCs won't invest in LLCs/S-Corps. I think this is because of preferred options... I'm sure someone else with actual experience could chime in.

cemerick2• 16 years ago

Heh, and most LLCs/S-Corps won't bother looking for Angel/VC investment. ;-)

That said, AFAIK converts (which seem to be getting popular these days, at least among sensible angels) are perfectly compatible with typical S corp structure.

fnazeeri2• 16 years ago

VCs/Angels don't invest in LLCs mostly because of UBTI http://en.wikipedia.org/wiki/Unrelated_Business_Income_Tax

seanharper• 16 years ago

I think 30% discount to what you would take in the open market.

fnazeeri2• 16 years ago

Check out http://www.compstudy.com/

It's an annual survey of private "high potential" companies (about 2/3 VC backed) executive compensation. You can find detailed data on base salary, target/actual bonus, equity and more for various stage companies.

It's the "Kelley Bluebook" of startup executive compensation.

cullenking2• 16 years ago

Would be cool if it wasn't, you know, $999

jmatt• 16 years ago

Ya that's a lot of money. It makes sense that if you are concerned with VC backed executive salaries $999 is probably a minor expensive. Google had a link to an older one on scribd:

http://www.scribd.com/doc/13743949/2008-Compstudy-Report-in-...

NOTE: In the description it states this is an abridged version. It looks like the detailed version(s) are what cost so much money.

tptacek• 16 years ago

We pay ourselves market salary for our field, but we're not VC funded.

When my other friends and I started Sonicity, we all threw money in to start the company, and then when we got funded we took better-than-market salaries out. In reality, unless you're being stupid, founder salaries aren't on paper going to make much of a difference.

(There's a whole separate argument to be made about the tone you set in your company with salaries, but that's between you and your deity).

jasonmcalacanis• 16 years ago

In general VCs and investors are looking for folks who want to take the minimum salary necessary to live off of, while pumping every dime into the product.

Of course most VCs are making $250-$1M in salary per year. That doesn't count their carry... that's just their base salary.

here is what VCs generally do:

1. Pre-launch/Pre-revenue, 20-something founders: $50-100k

2. 30 something with two kids in private school: $100-250k

3. Profitable company having just completed a C round of $15-30m: $200k with a $200k bonus on hitting a huge milestone.

Also, the secondary market for stock has helped this... i.e. reports are the founders of Wordpress, groupon, facebook and digg got to selling a couple of million dollars in stock.

best jason

pjy04• 16 years ago

I think #1 is going to experience the most amount of scrutiny. I'll be more conservative if the pre-launch/pre-revenue amount is under 1m. It'll probably be closer to 40-60k

massimosgrelli• 16 years ago

I think this approach can lead to kill start-up potential at the beginning. A founder is an entrepreneur and if a company has no money - because of it has insufficient revenues - than the founders must deal with the fact to not touch their company bank reserve except for eating :) So for #1 I would say: no income except for eating and sleeping. For my company - as a founder - I would do that way. Massimo Sgrelli

portman4• 16 years ago

A lot of people seem to be saying "market". But for us, it was based entirely on need.

After talking to our families, each of us came up with the minimum salary required to maintain our current lifestyle. The idea is that a founder should not be saving any money, but they also shouldn't be forced to move into a smaller home or stop eating out.

What's interesting is that this produced 3 very different salaries, even though our "market" rates are roughly equal.

Our VCs were completely supportive of those numbers and did not push back at all.

_delirium2• 16 years ago

Interesting--- salary based on need, while contributions presumably are based on strengths of each founder. I've heard that compensation strategy somewhere else... ;-)

(http://en.wikipedia.org/wiki/From_each_according_to_his_abil...)

redorb• 16 years ago

I bet the above company does plan on some time in the future; having more "normal" and "market based" salaries; otherwise they could have worked anywhere for below market wages. They have to have a plan for making more money down the road that won't depend on their needs; but value.

StavrosK• 16 years ago

And when the person who can contribute the least has the biggest financial needs, fun things happen.

portman4• 16 years ago

Wait until you hear the awesome propaganda music we play every morning.

plorkyeran• 16 years ago

Communism does often work well in small, close-knit groups, and I would certainly hope that the founders of a startup living on VC money would fall into that category.

techsupporter• 16 years ago

Genuine question: Why shouldn't a founder be putting aside savings? Does savings include any accumulation of money, or just liquid cash and allows for retirement planning? I understand that the founder is being paid with venture capital, but what is supposed to happen if, even against the founder's every desires, the business goes bust, the founder is no longer able to work for some reason, or a myriad of unintentional-yet-plausible reasons why the founder might no longer be drawing that salary?

Granted, this comes from the perspective of a person whose entire life's income can be documented on a series of W2 forms, so I beg your indulgence of my ignorance.

portman4• 16 years ago

That's a great question.

The financial goal of a startup is (often) to generate a lifetime of wealth in 3-4 years of intense work. After 3-4 years, a startup will either succeed or fold. Because the timeframe is bounded, it's possible for a founder to forgo any personal savings without irreparably damaging their personal finances.

For example, speaking for myself, at my last job I was saving about $60,000 per year. Not contributing that money to my savings over the next 3-4 years isn't a huge deal. If my startup fails, I've only lost 3 or 4 years of savings.

However, it IS a huge deal for our STARTUP to save $60,000 per year. That's a full-time junior employee. If not spending that money increases the likelihood of a successful exit, then it's a prudent financial strategy for me. The effect is multiplied if the other cofounders forgo their savings as well.

Note that this is only my second VC-backed startup. Others with more startup experience may very well have different advice or reasoning.

seanMeverett• 16 years ago

It's directly correlated to your bottom-line net income and return on invested capital. If you can scrape by on nothing and invest everything possible back into the business (assuming you have a high ROIC).

It also assumes you have enough profit to pay yourself. Thus, the 33k is prob best if you're not living on ramen and tuna (go grab a beer as one commenter suggested). Because, if you're investing back into the biz then your future salary is exponentially higher.

For example, my interactive marketing company is experiencing triple digits ROIC so we have yet to take a dollar out of the company and continue to invest not only profits buy our own outside cash (and it's been well over a year) but we're getting to the point where we need to pay some bills and feed ourselves. Thus, we're going to keep our salaries as low as possible to cover our personal expenses like rent and food. We're doing this because we know a year from now we're going to much, much more profit to work with. So you want a hard number? Less than $30k per year. Pow.

dennyferra• 16 years ago

If you have a wife and kids... enough to cover expenses + some breathing room.

seldo2• 16 years ago

My co-founder doesn't have a salary (though he does get our health benefits). I'm on an H-1B so my salary legally required to be "market rate", as set by the US government for my job title and location (a fact apparently not very widely known).

michaelhalligan3• 16 years ago

I've known several DBAs on H-1B's who were paid severely under market rate for what they were doing. How is "market rate" defined?

dotBen2• 16 years ago

You're either trolling or (may I politely point out) you risk coming across as one.

That's a whole different conversation, totally OT to the OP. I'd suggest you spin up another thread to debate that, or search the archives on hn.

seldo2• 16 years ago

You can search for prevailing wages here:

http://www.flcdatacenter.com/OesWizardStart.aspx

A database engineer in San Francisco is here: http://www.flcdatacenter.com/OesQuickResults.aspx?area=41884...

The levels are (very roughly): 1 = entry-level, 2 = junior, 3 = experienced, 4 = senior, usually with some management.

So they would be required to pay at least $92k; they can pay more if they want. However, it varies by area - the same DBA in LA would earn $3k less.

stevefarnworth• 16 years ago

You can't have money worries when trying to build your business. It's distracting and could well cost the VCs more in the long run if you have other worries/can't focus 100% on the job in hand.

If your expenses are $4000pcm, then take $5500/$6000. You're running a company after all, and that precious down time you have has to be maximised (generally costing money).

If you're financially happy you'll have no need to work, but you'll want to.

newmediaclay• 16 years ago

We didn't pay ourselves until the company was profitable. This was somewhat easier since we started the company while in college and had pretty much no standard of living to maintain.

We didn't take any funding, so it really wasn't possible to pay ourselves before becoming profitable unless we took on other debt. We decided we'd rather be individually poor with a company than individually wealthy with no company.

Once the company was profitable, the partners agreed on a goal-oriented pay structure. The base was under market value compared to other opportunities, but was still more than enough to easily live on. Then, by hitting reasonable revenue targets, salary would increase quickly.

aneth• 16 years ago

A related issue that I don't see addressed in the comments is the trade off between salary, opportunity cost, and equity. If there are two founders, one who could earn $150k, and the other who could earn $50k, should the former always get three times the latter in compensation, given equal commitment? If there is no salary in a bootstrapped startup should one get three times the equity (or at least some portion of allocation)? If both have the same market salary, but one has greater need, should the one be paid more? Should they in consequence get less equity?

All difficult questions I don't have an answer for.

robertg• 16 years ago

I've been in business for 5 months and I pay myself $0.

mkramlich• 16 years ago

i have a bias against outside investment so i can maximize simplicitity and control, minimize risk of somebody fucking me over, and so i can choose my own pay.

cullenking2• 16 years ago

I know you mentioned VC funded startups in the original post, however it seems this is becoming a digest for all interested parties to share/get info on startup salaries, so I'll chime in with numbers from our bootstrapped company, http://ridewithgps.com

I am pulling $1k a month from our business, which is a bit under what we bring in right now. It allows me to focus less on outside money and more on the business, and, as soon as we get more, I will be able to take $2k. This is bare minimum for me to live off of, and I'll maintain it here until my cofounder is able to come on at $2k and make his bare minimum to quit his dayjob.

After that, salaries can increase as revenue increases, up to "industry standard" wages. We are currently an S-corp, so we have to figure this out, which is turning out to be kinda tricky. According to the IRS, is a founder considered a CEO if the business has no CEO? Does that mean if we don't take $150k a year in salary we are going to get the hammer from the IRS? Trial by fire!

SteveMorin• 16 years ago

I am a big fan of bootstrapping so I do what I think is a common mantra on HN is pay your self as little as possible to survive. Once the company is profitable you can start increasing your salary to market rates.

After all your a founder you here to make something successful not pull a fantastic salary. Your a owner!

hairball• 16 years ago

Generalization: Entrepreneurs, as a group, come out worse than VC's, as a group, on these types of negotiations. The CEO/Founder is taking a much larger risk, and is much more committed (deeply invested), than the VC's that fund them because the VC's spread their risk across multiple companies. It's a shame that an argument as thin as "taking less salary shows commitment" when the investors are not similarly committed (their salaries remain fat as ever, regardless of their performance). People can get more money, but they can't get more time. And the CEO/Founder generally devotes 3 to 7 years of previous time. The equity upside is not a valid justification for below market wages because investors get that without sacrificing theirs. There needs to be some symmetry in the commitment between CEO's and investors.

$180K/yr for a first-round company ratcheting up with each subsequent round. If you're not raising enough to afford that, then you're not raising enough. Consider delaying the round to create more value if VC's are taking too big a piece of the pie.

_b8r0• 16 years ago

In the UK there are two main sources of income for company directors and shareholders: Pay As You Earn (PAYE) and Dividends.

You have different tax thresholds so most self-owned directors I know tend to take an amount that leaves a minimum in terms of tax liabilities combined with a healthy fund for tax deductable expenses and so on. The company itself also pays tax, so in some cases it may be preferable to go PAYE as it moves the director's renumeration from profit to operating cost.

Most of the directors I know take between £41k (although I think the combined income/dividend efficient limits are higher this year) and around £60k, and spend anywhere from another 10 to 50k through the company.

Directors I know who are brought in to run companies they don't own tend to get paid over £100k with a bonus.

cloudsafe• 16 years ago

There is no fixed sum.

But if you are a skilled professional you should calculate "opportunity costs":

If you could get a job with 250k payment and you pay yourself only 50k - you are theoretically loosing 200k a year.

If the same startup generates 200k of profit for the first year and you own 50% if it you are still loosing 100k.

Then again if this startup could be sold right now for 500k - your up 150k.

Next step would be probabilities:

If you have no offer on the table but there is a 80% chance your startup could be sold for 1m, calculate with 800k. And stop adding this extra value if your exit probability is low.

Ask HN: How much do founders pay themselves?

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